Sovereign Wealth Funds – the Financial Muscle to Influence Corporates and Economies
Stanley report February 2008)
Fear factor
These investments demonstrate the complex interdependence of the Pacific Rim and Middle East with the US economy. Official and private commentators have expressed concerns about the transparency of SWFs, including their size, and their investment strategies, and that SWF investments may be affected by political objectives.
Compared to mutual funds or pension funds, there is less transparency of most SWFs. Alan Greenspan (an economist and the ex-chairman of the US Federal Reserve) pointed out, the strongest check against financial misbehavior is “counterparty surveillance” – the incentive of investors to make sure that their investment funds are acting prudently and profitably. In light of this The Sovereign Wealth Fund Institute has developed Linaburg-Maduell Transparency Index. The index is a method of rating transparency in respect to the sovereign wealth funds.
There are several means through which SWFs could theoretically, influence the policies and capabilities of countries. It is possible, for example, that Blackstone has had preferred access to the Chinese market. Following Chinese SWF’s (CIC) investment in Blackstone IPO (2007), the latter has purchased stake in a state-owned Chinese chemical manufacturer, as well as a high-end commercial building in downtown Shanghai.
Chart showing investment approach and transparency for the Top 20 SWFs:
(Source: The Sovereign Wealth Fund Institute)
Savior in the current financial crisis
In the recent financial turmoil, SWFs have demonstrated that they can have a
stabilizing influence on markets. All big US and EU banks took help from SWF.
Bank
Sub-prime losses ($ billions)
Sovereign Wealth Funds involved and funds injected
Merrill Lynch
31.7
11 including
4.4 Tamasek, Singapore
2.0 Korea Investment Fund
2.0 Kuwaiti Investment Fund
0.3 New Jersey Division of Investment
Citigroup
40.0
20.0 including
7.5 Abu Dhabi Investment Authority
6.8 Singapore Investment Corp
3.0 Kuwait Investment Authority
0.4 New Jersey Division of Investment
UBS
38.0
9.7 Singapore Investment Corp
Morgan Stanley
12.6
5.0 China Investment Corp
Barclays
4.2
2.9 China Development Bank
Since the subprime-mortgage fiasco has unfolded, such funds have contributed almost billion on recapitalizing the world’s biggest investment banks. In this the SWF have also lost their wealth like Abu Dhabi SWF, invested .5bn in Citigroup bonds that will convert to shares in 2010 and 2011 at prices from to . But since then Citigroup casualties of the sub-prime mortgage crisis and its share price has plunged as low as i.e. nearly 40% lower than when the Abhu Dabi SWF made its investment. SWF have deftly played the role of rescuer just when Western banks have been exposed to the global financial system.
These funds have also supported their home markets like funds in Qatar and Kuwait bought shares of listed banks to boost confidence, while the Chinese funds (CIC) pumped cash into state commercial banks
Going forward funds have plans to take long term position in the markets like Qatar’s SWF plans for new real estate acquisitions in 2009 as global prices decline and investors and developers are forced to sell assets at depressed prices.
Departing thoughts
So clearly from the viewpoint of international financial markets is that Sovereign Wealth Funds (SWFs) can facilitate a more efficient allocation of revenues from commodity surpluses across countries and enhance market liquidity, including at times of global panic and financial stress. These are likely to facilitate the replenishment of the capital. In near future countries like Brazil, India and Nigeria plan to create new funds. Morgan Stanley estimates an annual growth of 10%-20% for next few years, and its assets are expected to exceed those of central banks by 2015. These funds have some serious transparency issues which the IMF, the World Bank, and the OECD are jointly working through creation of broad guidelines for both the home and the recipient countries.
SWFs and financial stability
Stabilizing effects
Destabilizing effects
Long term investment strategy
Lack of transparency
Provision of ample liquidity
Lack of regulation
Non-reliance on debt financing
Risk of financial protectionism due to non-commerical investment